The Lowdown from Investment Quorum

September 10th, 2018

Global Markets to 7th September 2018 Highlights The week ends with the NASDAQ posting its worst start to September since 2008. President Trump says he is ready to impose tariffs on more than US$500 billion worth of Chinese imports to the United States. A former PBOC governor says that the US tariffs will have […]

Global Markets to 7th September 2018

Highlights

The week ends with the NASDAQ posting its worst start to September since 2008.

President Trump says he is ready to impose tariffs on more than US$500 billion worth of Chinese imports to the United States.

A former PBOC governor says that the US tariffs will have insignificant impact on China.

Sterling continues to strengthen after the EU’s chief Brexit negotiator triggers hopes of a soft Brexit. But is this temporary?

Emerging markets and their currencies stabilise over the week, but additional tariffs could have further negative effects on these regions.

Global equity markets begin to show some signs of fatigue, but this might turn out to be seasonal effect – given how the markets have performed previously in the month of September.

Market Summary

As we enter September, the effects of seasonal and historical forces begin to make themselves felt. In recent months, the US stock market appears to have decoupled from the rest of the world and this is very much in evidence when the differences in their performance to date are considered.

Continuing trade war tensions between the US administration and Beijing have affected markets in very different ways: Wall Street has been reaching new all-time highs, while China’s Shanghai Composite Index is firmly in bear market territory. This, in turn, has affected the emerging markets: the MSCI Emerging Market Index has also moved into bear market territory.

Interestingly enough, although the Trump Administration appears to be winning as far as trade war sentiment is concerned (the US economy has strengthened, corporate profitability has increased, unemployment rates have fallen and protectionism is being projected through Trump’s “America First” approach), this might not necessarily hold true in the future.

Indeed, it was interesting to hear from a former governor of the People’s Republic of China last week. He predicts that the recent US tariffs will have an insignificant effect on China’s economy – instead, they will serve as an incentive for them to diversify their exports elsewhere around the world, finding new trade partners and developing new relationships.

Clearly, with the US stock market at its current level, the issue of valuation is now a source of concern for some of the investment fraternity. The future US economic landscape does indeed look more agitated, particularly in view of the Federal Reserve Bank’s approach of maintaining its policy of gradually raising interest rates henceforth, and the continued tit-for-tat trade war tensions between the two superpowers. These concerns were apparent last week: there were significant moves in both US Treasury yields and the US dollar – both climbed higher as expectations of a further increase in US interest rates in September gained momentum.

Obviously, the current P/E ratio for the S&P 500 Index is much higher than it has been for some years. Furthermore, with the two-year US Treasury bond yield currently at a decade high and 0.90 BPS higher than the S&P dividend yield, the situation does appear somewhat atypical. But if we cast our minds back to those stratospheric days of the 1990s and the early 2000s, P/E ratios were far higher than they are today, and so the case for owning US equities might still be justified, albeit on a selective basis.

US stock prices did in fact retreat last week, including prices in the much-favoured technology sector, where two companies – Apple and Amazon – have now surpassed the US$1 trillion market cap. And in China, Jack Ma – co-founder and executive chairman of Alibaba Group – has announced his decision to retire from the business, making him the richest man to retire from a company that he co-founded.

As far as the foreign exchange markets are concerned, we saw sterling rally against the US dollar in growing anticipation of a soft Brexit. Sterling has clearly become the most problematic trade on the FX market, since any form of Brexit will have enormous ramifications on the currency’s value and the US stock market.

Sterling has been trending downwards for decades, its value occasionally bolstered by external events. However, the long-term trend is unlikely to change unless we experience a post-Brexit boom similar to what the US has recently been enjoying.

It goes without saying that a messy Brexit would leave sterling vulnerable to further falls against the dollar. But this would not necessarily hold true in relation to the euro, given Europe’s current situation and the euro’s fragility. Periods of uncertainty affecting countries such as Italy and negotiations with the European Union and the European Central Bank could have further ramifications for the eurozone beyond Brexit.

Finally, global equity markets are showing some signs of fatigue: with the exception of the US, they have been on a downward trajectory for most of this year. Wall Street might experience some profit-taking over the autumn months, although September is renowned for being a month of uncertainty. But global growth is expected to reach 3.3% in 2018 (unchanged from 2017), before moderating to 3.0% in 2019.

Regarding asset allocation, equities still look more attractive than bonds. But there are certainly pockets of overvaluation at regional, sector and stock levels. Selective buying is therefore likely to be the best tactic and the most appropriate approach as we navigate choppier waters.

Peter Lowman, Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.

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